Should U.S. say it's selling gold before world learns it's long gone?

Today's Financial Times carries an essay by former Federal Reserve economist and former assistant U.S. Treasury Secretary Edwin M. Truman headlined "America Should Open Its Vaults and Sell Gold." For years Truman has been turning up at the center of the gold price suppression scheme, but GATA and its supporters might agree with him in principle on this one, insofar as getting central banks out of the gold business is the first step toward a free market in gold.

Of course these days free markets are the last thing that Western central banks want, central banking's main objective lately being to prevent any markets from occurring anywhere. So Truman's objective here may be quite different from what it seems.

That is, Truman may be floating an idea for the cover story needed to conceal the disappearance of the U.S. gold reserve.

In its struggle to prevent GATA from obtaining access to its records about the U.S. gold reserve, last year the Federal Reserve, perhaps inadvertently, acknowledged that it has gold swap arrangements with foreign banks:

That acknowledgement adds to the evidence that much if not most or all of the Western European central bank gold sales and leases of the last decade were actually transactions fronting for the U.S. government and that U.S. gold was swapped for the Western European central bank gold used in the price-suppression scheme. If such swaps actually were undertaken, much of the gold still held by the U.S. government likely belongs to other governments, like Germany, whose Bundesbank admitted last year that much of its gold is held at "trading centers" outside the country:

With Republicans likely coming to power in the U.S. Congress in the November election, the prospects for legislation proposed by U.S. Rep. Ron Paul, R-Texas, to audit the Fed and the U.S. gold reserve will improve dramatically. Eventually the U.S. government may require an explanation for the depletion of the reserve. In his essay in the FT today Truman offers one: Say it is being sold before the public learns that it was effectively sold a long time ago.

If this speculation seems too far out, why, for starters, does the Fed insist on keeping its gold swap records secret? Whose gold is it -- or was it? The American public's, or someone else's?

Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time -- to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost.

It is an article of faith in bullion markets that the US will be the last country to dispose of its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to re-examine its policy.

On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia.

Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013."

The market price of gold has risen for more than a decade propelled by low interest rates, the hype of the bullion dealers (holding large inventories), and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 per cent over the next year.

Meanwhile, the US Treasury holds 261.5 million fine troy ounces of gold. The government has been sitting on it since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340 billion. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2 1/4 per cent of gross domestic product. (US net government debt would decline by essentially the same amount because the US gold stock, listed as an asset on the balance sheet, is valued at only $42.22 an ounce.) Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

This proposal has other benefits too. First, the US would be obeying the maxim to buy low and sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble, as seems likely, the sooner it is burst, the better for the average investor.

Some people point to possible costs. Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that they would disrupt the market. But the US can be cautious in its sales, avoiding disruption of the sales programmes of other countries, as it has in the past. There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (The US is not a party to the agreement.) Also the International Monetary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.

Another counterargument is that the US should hold on to its stock in anticipation of a return -- by itself alone or with other nations -- to a monetary system based on gold. But returning to the gold standard would reinstate a system associated with unstable prices, wages, output, and employment. It has not existed for a century; and will not make a comeback. Official discussions of the reform of the international monetary system do not include any advocates of a return to gold, and the IMF articles of agreement prohibit it. The sooner thoughts of such a return are laid to rest, the better.

A related argument is to keep the US gold stock as a "rainy day" precaution. But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?

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The writer is a senior fellow at the Peterson Institute for International Economics in Washington.
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Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

For Prophecy's complete press release about its production plans, please visit: